ETHICS IN MERGER & ACQUISTIION.pptx

7/28/2019 ETHICS IN MERGER & ACQUISTIION.pptx

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A transaction where twofirms agree to integrate

their operations on arelatively co-equal basisbecause they haveresources and capabilitiesthat together may create astronger competitiveadvantage.The combining of two ormore companies, generallyby offering thestockholders of one

company securities in theacquiring company inexchange for the surrenderof their stockExample: Company A+

Company B= Company C.


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A transaction where onefirms buys another firmwith the intent of moreeffectively using a corecompetence by making theacquired firm a subsidiary

within its portfolio ofbusinessIt also known as a takeoveror a buyoutIt is the buying of one

company by another.In acquisition twocompanies are combinetogether to form a newcompany altogether.

Example: Company A+Company B= Company A.


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MERGER ACQUISITION

i. Merging of two organization

in to one.

ii. It is the mutual decision.

iii. Merger is expensive thanacquisition(higher legal cost).

iv. Through merger shareholders

can increase their net worth.

v. It is time consuming and the

company has to maintain so

much legal issues.

vi. Dilution of ownership occurs

in merger.

i. Buying one organization by

another.

ii. It can be friendly takeover

or hostile takeover.

iii. Acquisition is less expensive

than merger.

iv. Buyers cannot raise their

enough capital.v. It is faster and easier

transaction.

vi. The acquirer does not

experience the dilution ofownership.


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WHY IS IMPORTANT PROBLEM WITH MERGER

i. Increase Market Share.

ii. Economies of scale

iii. Profit for Research and

development.iv. Benefits on account of

tax shields like carriedforward losses orunclaimeddepreciation.

v. Reduction ofcompetition.

i. Clash of corporate

cultures

ii. Increased businesscomplexity

iii. Employees may be

resistant to change

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WHY IS IMPORTANT PROBLEM WITH ACUIQISITION

i. Increased marketshare.

ii. Increased speed tomarket

iii. Lower risk comparingto develop newproducts.

iv. Increaseddiversification

v. Avoid excessivecompetition

i. Inadequate

valuation of target.

ii. Inability to achieve

synergy.

iii. Finance by taking

huge debt.

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Generally, a company with the track

record should have a less profit

earning or loss making but viable

company amalgamated with it tohave benefits of economies of scale of

production and marketing network,

etc. As a consequence of this merger

the profit earning company survives

and the loss making company

extinguishes its existence. But inmany cases, the sick companys

survival becomes more important for

many strategic reasons and to

conserve community interest. The law

provides encouragement through tax

relief for the companies that are

profitable but get merged with the

loss making companies. Infect this

type of merger is not a normal or a

routine merger. It is, therefore, called

as a Reverse Merger.


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Division of a Company

with two or more

identifiable business units

into two or more separate

companies.


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MERGER REVERSE MERGER

Combining of two ormore commercialorganizations intoone in order to

increase efficiencyand sometimes toavoid competition.

As a commercial

term, it means when a

Healthy Company (in

terms of size, capitalor listing status)is

merging in a Weak

Company (in terms of

size, or unlisted).


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Learn from mistakes of others

Define your objectives clearly

Complete strategy to achieve goal.

SWOT analysis for the merged business - amust

Conservative attitude necessary atevaluation deskstrong arguments to support

projectPick holes in strategy to get the best

Will merged units be able to work atefficient / ideal level?

Acquire expertise to interprete changes


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The purpose for an offerorcompany for acquiring

another company shall be

reflected in the corporate

objectives. It has to decide the

specific objectives to beachieved through acquisition.

The basic purpose of merger

or business combination is to

achieve faster growth of the

corporate business. Faster

growth may be had through

product improvement and

competitive position. Other

possible purposes for

acquisition are short listed

below: -


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(1)Procurement of supplies:

(2)Revamping production facilities:

(3) Market expansion and strategy

(4) Financial strength:

(5) General gains:


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(6) Own developmental plans

(7) Strategic purpose:

(8) Corporate friendliness:

(9) Desired level of integration


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(A) Verticalcombination

(B) Horizontalcombination

:

(C) Circularcombination

(D)Conglomeratecombination


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In other words, in vertical

combinations, the mergingundertaking would be either a

supplier or a buyer using its

product as intermediary

material for final production.

The following main benefitsaccrue from the vertical

combination to the acquirer

company i.e.

it gains a strong position

because of imperfect marketof the intermediary products,

scarcity of resources and

purchased products;

has control over products

specifications.


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It is a merger of two competing

firms which are at the same

stage of industrial process. The

acquiring firm belongs to the

same industry as the target

company. The mail purpose of

such mergers is to obtaineconomies of scale in production

by eliminating duplication of

facilities and the operations and

broadening the product line,

reduction in investment inworking capital, elimination in

competition concentration in

product, reduction in advertising

costs, increase in market

segments and exercise bettercontrol on market.


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Companies producing

distinct products seekamalgamation to share

common distribution and

research facilities to obtain

economies by eliminationof cost on duplication and

promoting market

enlargement. The acquiring

company obtains benefits

in the form of economiesof resource sharing and

diversification.


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It is amalgamation of twocompanies engaged in unrelated

industries like DCM and Modi

Industries. The basic purpose of

such amalgamations remains

utilization of financial resources

and enlarges debt capacitythrough re-organizing their

financial structure so as to service

the shareholders by increased

leveraging and EPS, lowering

average cost of capital and

thereby raising present worth of

the outstanding shares. Merger

enhances the overall stability of

the acquirer company and creates

balance in the companys total

portfolio of diverse products and

production processes.


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As we all knowcombination of twocompanies effect numberof people.

So at the time ofmerger or acquisitiontheir emotions and othersocial things should betake in to mind . may be

those things are notcompel by law to follow.But our social valuescompel more than law,these are called ETHICS


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Ethics is not an exact science. People define Ethics in

accordance with their own set of values which differ

depending on time, place and culture. Webster's defines Ethics

as "the discipline dealing with what is good and bad or rightand wrong or with moral duty and obligation." The word

derives from the Greek word meaning "moral," a Latin word

with roots in "mores" or "customs"in other words the values

held by society.


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Managerialmischief.

Moral

mazes


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Madsen and Shafritz, in theirbook "Essentials of Business

Ethics" explain that"managerial mischief" includes"illegal, unethical, orquestionable practices ofindividual managers ororganizations, as well as the

causes of such behaviours andremedies to eradicate them."There has been a great dealwritten about managerialmischief, leading many tobelieve that business ethics ismerely a matter of preaching

the basics of what is right andwrong. More often, though,business ethics is a matter ofdealing with dilemmas thathave no clear indication ofwhat is right or wrong.


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Moral mazes. The

other broad area ofbusiness ethics is"moral mazes ofmanagement" andincludes the numerous

ethical problems thatmanagers must dealwith on a daily basis,such as potentialconflicts of interest,

wrongful use ofresources,mismanagement ofcontracts andagreements, etc.


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Mergers and acquisitions

involve a wide array ofethical questions, some of

which relate to the degree

of "fit" between the value

systems of the merging

firms. A mismatch can

sometimes lead to serious

problems, such as when

one firm invests heavily in

employees and the otherfocuses mainly on

shareholders or customers


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A secondary category of ethical issues, she notes,

involves questions arising from the actual M&A;

transaction. Some really vexing issues surface in the

course of these deals. Management must decide, for

example, when to disclose plans for the merger, what

restrictions to place on insider use of information,

what counts as fair and proper accounting and

taxation,


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During a merger and acquisition many employees

lose their jobs. Because of combination of

companies many of them become obsolete. So at

that time it is ethical responsibility ofmanagement to try to maintain their living

standard either by giving them compensation or

by creating new job opportunities for them


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Other major ethical issue during the cross nationalmergers and acquisitions is the legal policies ofreceiving country. Many of the rules are differentin different countries so it is ethical as well aslegal responsibility of company to take care ofthem. Like the taxation rules of country, rulesregarding child labor etc. For example, the legaldefinition of 'redundant employees' varies widelyas do requirements for severance arrangements.In the face of such differences, managers of themerging companies have to wrestle with what is

fair to the different sets of employees and whatwill help build a cohesive organization with asingle set of ethical standards going forward.


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The two countries are different from each other at

cultural point of view. So it is ethical duty of

companies to take care of cultural values of both

companies. For example a U.S company enters in

India via merger have to adopt women dress-code

according to Indian cultural that may be different

from U.S.A. They also have to take care of working

hours of women because Indian culture hardly

allows women to work at night. So above points arenow not legally bond but these are important from

ethical point of view.


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Sometimes companies enter into such a agreement

which intensely or not intensely creates monopoly in

the concern market. These type are agreement are

void in the eye of law also but every law has some

lose ends so companies take advantages of those to

enjoy the monopoly it is unethical in nature and

should be avoided because it directly resulted as

consumer exploitation. Companies enter in M&A to

reduce competition but beside that they should take

care about the consumers also.


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Companies have goal to maximize the wealth ofshareholders and the decision about a companys merger

or acquisition starts affecting the value of shares months

before the actual transaction. The affect may be positive

or negative so it is companys ethical duty to minimize

the negative impact on the prices of shares to protect the

wealth of shareholders


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Sometimes companies take secret the

information about merger and acquisition not

only from the outsiders but also from the

employees. So at the time of transaction there is

a sudden shift for employees which may cause aslow morale in them. It will have negative effect

for both employees and company so company

have to decide about the time of disclosure. So

employees can be mentally prepare for thechange.


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The other main area of concern is about how touse the resources of the host country. Company

should take care about that the use of natural

resources. Try to use them in such a way that they

are beneficially for both not for only the company.We can take example of such a unethically use of

resources from history. East India company use

Indian natural resources for the benefit of Britain.

But in todays world this kind of behavior is

unethical so it is ethical responsibility of company

to fair use of natural resources.


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Sometimes companies enter in a new market throughmerger and acquisition and starts disturbing the local orsmall scale industries. Because large companies have fairamount of financial resources and they are enjoying

economies of large scale so small scale industries areunable to stand in front of them. Taking advantages of thisMNCs try to vanish the local competition to enjoymonopoly. This may be profitable but it is unethical

because it may be result as unemployment at large scale

and consumer exploitation in long run. So it is also ethicalresponsibility of companies that when they enter in asmall market through merger and acquisition they shouldalso take care about the local competition.


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When organizations merge there is a

corresponding meshing of their compliance with

applicable regulations. More often than not,

organizations have achieved different levels of

compliance, and the merged organization needsa strategy to bring the laggard up to par (or both

up to par, if that is the case). In some instances,

the M&A may bring the need to comply with new

regulations, and that will require , planning,and execution.


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There should be proper communication with

the employees to help them to understand

about new management and their new role

with in the company. Management should

Implement change processes thorough

communication to all employees. This will

help employees to understand new

managerial rules and regulation.


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Inform customers of both entities on the

need and impact of the merger so they can

easily understand what will be the effect on

them this is beneficial for both company and

the customers. Because sometimes the loyal

customers of a company lose their faith in

company after changes in company name or

in any other manner so it is both ethic and

beneficial to give information to consumers

about such deals


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It is the human nature that the person give

much importance to the thing that is related

to him. In the same way buyer company give

more emphasis to its old employees rather

than the new ones. But the manager should

try to be non-discriminatory in nature.


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Some time a company some special services

or bonuses to the employees but after

merger the dominating company stops this

type of policy. Which creates feeling of

dissatisfaction among them because they

consider it as unethical behavior. So

management of new company should respect

the rights of employees they are already

enjoyed or try to remove them with proper

planning and consultancy.


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Company should not use

illegal ways to compelsome other company to

enter in deal. Normally

bigger companies use

their dominating

position to force the

smaller ones to enter in

acquisition or merger

deals. Mostly coercion

about capturing theirmarket or bribery to

upper management are

the common ways which

are not ethical andle al in nature.


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Revenue deserves more

attention in mergers; indeed, a

failure to focus on this important

factor may explain why so many

mergers dont pay off. Too many

companies lose their revenue

momentum as they concentrate

on cost synergies or fail to focuson post merger growth in a

systematic manner. Yet in the

end, halted growth hurts the

market performance of a

company far more than does afailure to nail costs

Some of the reasons why

Mergers & Acquisitions have

failed in recent times are as

follows :-


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>> Culture shock

>> 2+2>4 attitude

>> No plan

>> Poor integration:

>> People trouble:


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>> Lack of enthusiasm

>> Who needs you

>> Poor decisions:

>> Ego clashes


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